Chapter 11 Filing by Egg City Rejected : Bankruptcies: The court ruling puts a Japanese partner in a better position to take control of the huge chicken ranch.

A judge has rejected a bankruptcy filing by the American majority owner of Egg City in Moorpark, bringing the company’s Japanese partner one step closer to taking control of the ailing egg farm.

U.S. Bankruptcy Judge Calvin K. Ashland on Friday sided with the Japanese partner, Okura & Co. (America), in ruling that the bankruptcy petition was improperly filed without a vote of the board of directors of The Careau Group, the parent of Egg City. Okura owns 40% of The Careau Group, while former television actor Richard Carrott owns 54% and is Careau’s chairman.

Careau filed for reorganization Aug. 19 under Chapter 11 of the bankruptcy laws, hoping to stall a foreclosure by Okura while Careau appealed an earlier court decision that forced Careau to immediately repay Okura $36 million in loans and interest.

Careau doesn’t have the money, and that ruling--by U.S. District Judge Stephen V. Wilson--also gave Okura the go-ahead to foreclose on the 500-acre ranch and surrounding property. Egg City was once the world’s largest egg farm with 3.5 million chickens laying more than 2 million eggs a day, according to the Guinness Book of World Records.

According to Careau’s bankruptcy filing, its assets as of July 16 totaled $26.9 million, compared to liabilities of more than $40 million. Chapter 11 allows a company to continue operating and to be shielded from creditors’ claims while it reorganizes its finances.

The basis for the bankruptcy filing “is that $36 million wipes out the assets of the company,” said Michael W. McCann, the Santa Barbara lawyer who represented Careau in the earlier case. “We feel that the judgment was in error and will be reversed on appeal.”

But Okura claimed that its two representatives on the Egg City board of directors were not informed of the bankruptcy decision and would not have approved it. The reversal of the bankruptcy filing “was a complete vindication for Okura,” said Okura’s attorney, William E. Stoner.

He said that once a receiver is appointed by Wilson, Okura plans to take control of Careau’s stake in the company and elect a new board of directors. Stoner also said Okura plans to continue operating the company as an egg farm at the existing levels of production, and it wants to fire Carrott as chairman and chief executive once a new board is elected under Okura’s control.

Careau’s attorney in the case, Theodore G. Johnsen, declined Monday to comment on the ruling. Carrott did not return phone calls requesting comment.

Okura sued to foreclose on Careau in February, 1990, saying Careau defaulted on $30 million in loans that Okura made to help rescue Careau from its first bankruptcy in 1986. In return for its initial $13-million loan, Okura obtained a 40% stake in Careau (the remaining 6% is owned by Carrott’s partner, Gerald Rosen).

Wilson threw out most of a countersuit by Careau that claimed that Okura had intended all along to take over the egg farm by forcing Careau to default on the loans. Wilson also held Carrott and his wife, Marie Antoinette Carrott, personally liable for any part of the $36 million not covered by Egg City’s assets, because the couple are guarantors of the Okura loans.

The attempted bankruptcy filing marks the latest twist in a two-year dispute between Okura and Careau.

Despite the infusion of cash from Okura in 1987, Egg City continued to lose money. In its fiscal year that ended October, 1988, the company lost $6 million, about the same as when it first filed for Chapter 11 bankruptcy protection in 1986, according to written testimony by Egg City’s former controller, Jack Neely.

Okura said it lent Careau the money to keep the ranch going as a source of eggs for its parent, Okura & Co. Ltd., a Japanese trading company. (Okura sells most of the eggs to Q. P. Corp., Japan’s largest mayonnaise manufacturer). Careau’s Chapter 11 filing in 1986 came as the company was engaged in a bitter dispute with the United Farm Workers, which went on strike against Egg City over a wage cut.

Carrott claimed that Okura devised a series of schemes to make it impossible for Careau to repay the loans, thus opening the way for Okura to foreclose on the ranch. For example, Careau alleged that Okura broke an agreement by refusing to provide additional financing for a modernization program at the farm. Wilson rejected that claim.

During the trial over Careau’s loan default, Careau cited several internal Okura memos in which Okura asserted that it would eventually exercise control over Careau. Okura, however, maintained that its relationship to Careau was simply that of lender to borrower. Judge Wilson agreed.

“In the context of the parties’ ongoing lender-borrower relationship, the level of control given to Okura was not undue or excessive,” Wilson wrote in his 49-page opinion. “There is nothing unusual about a lender taking a minority equity interest in the borrower or about placing directors on the board of directors of the borrower.”

Careau’s lawyer, McCann, said Okura had its eyes on the farm’s real estate, which McCann said could fetch $50 million if subdivided into residential lots. But according to Judge Wilson, Okura had already rejected a Careau proposal to relocate the egg farm and subdivide the property, a decision that Careau labeled a breach of Okura’s fiduciary duty to the company.

“The evidence at trial was that the egg ranch was not zoned for residential use and would not be so zoned in the foreseeable future,” Wilson wrote in his opinion. He said it was hard for the court to see how Okura could be blamed for “refusing to consider Carrott’s speculative real estate proposals at a time when Careau was already in default on the principal loans.”